A first-time home buyer owes $5,000 to the Canada Revenue Agency after withdrawing her retirement savings for a condo down payment.

Her story provides an example of what not to do when taking advantage of a government-sponsored tax shelter program.

Susan (not her real name) realizes she didn’t take enough precautions when closing a real estate deal under tight deadlines in a hot market.

“I bought a one-bedroom condo in 2011 and cleaned out all my savings to do it, including my RRSPs,” she says.

Since the Toronto condo was close to a subway station, it attracted interest from several buyers. There was a bidding war.

Susan ended up paying $407,000, which was higher than the listing price and more than she had expected to pay. She scrambled to make a 20 per cent down payment to avoid paying a premium for mortgage default insurance.

In the two months before the deal closed, she took out $13,000 from her registered retirement savings plans at two banks.

She didn’t know anything was wrong until she received a $5,000 tax bill a few months ago on the withdrawals.

What happened? She was being penalized for not declaring that she was a first-time home buyer when she took out the money.

?“I stupidly did not tell the banks what the money was for. This meant they weren’t informed to be able to properly designate the RRSP withdrawals,” she says, blaming inexperience for the error.

This was her first mistake. She should have tried calling the Canada Revenue Agency and checking its website – which is easy to navigate – to find out exactly how the Home Buyers’ Plan (HBP) worked.

The HBP allows you to withdraw up to $25,000 from your RRSP in a calendar year to buy a qualifying home.

You must complete form T1036 for each eligible RRSP withdrawal.

After you fill in one area, you give the form to your RRSP issuer to fill in another area.

Your RRSP issuer will send you form T4RSP, showing the amount you withdrew under the HBP in box 27. You have to attach this slip to your income tax return.

Susan made another mistake. She assumed it was easy to fix the paperwork – which hadn’t been done properly – and backdate it more than two years.

“I spoke to two CRA representatives, both of whom confirmed that I could retroactively designate the RRSP withdrawals under the Home Buyers’ Plan. All I would need was for the banks to reissue my T4 slips,” she said.

But when she asked the banks to reissue her T4 slips, one seemed willing. The other said absolutely not.

Banks are allowed to make their own decisions on such matters.

“If the form is not completed as stipulated in advance of the withdrawal, the Minister of National Revenue does not have any legislative authority to retroactively reclassify a withdrawal from an RRSP as a withdrawal under the HBP,” said CRA spokesman Philippe Brideau.

CIBC, the bank that refused her request to reclassify the RRSP withdrawal, did not want to comment about Susan’s case in particular.

“There are forms to fill out,” said CIBC spokesman Kevin Dove. “If you don’t fill them out, you can ask to change something on a backward basis. But it’s more possible to do it when you take the mortgage out with us. Then, we have an audit trail.”

It would be hard to tell the CRA that a customer withdrew RRSP funds for a first home if CIBC had no record that the money was used for that purpose, he explained.

Susan had used a mortgage broker to arrange financing and had borrowed from a smaller financial institution. So, she couldn’t fall back on being a CIBC mortgage customer.

“This is my money,” she said in her email. “Is it fair that the government should be pocketing money that isn’t theirs?”

This was Susan’s third mistake – not realizing the government always has its hands in your RRSP. Since your contributions are deducted from income and not taxed, you will be taxed on withdrawals at a later date.

Free seminar: My financial basics workshop will be held Tuesday, May 13, at Ryerson University’s Chang School, 5.30 to 9.30 p.m., at 297 Victoria St., Toronto. It’s open to everyone who wants to brush up their money management skills.

Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca or www.ellenroseman.com for more information about mortgages in Barrie, Barrie Mortgages, information on the best mortgage rates from a mortgage broker visit www.darick.ca or call Darick Battaglia directly at 705 623 8658